It naturally follows that the level – and to some extent the structure – of taxation is closely linked to the
level of public expenditures. Several factors are shaping the degree of government intervention in the
economy^3. First, the level of economic development is impacting the efficiency of markets and hence the
need for policy intervention. In more developed economies, for which basic needs are fulfilled, citizens
may express a higher desire for larger social programmes, a phenomenon known as the Wagner Law or
Law of Increasing State Spending^4. Next, the level of technological development may shape government
spending in several directions. Technological improvements may break natural monopolies and hence
create less scope for direct public intervention. Innovation can also reduce the cost of existing
technologies but in the same time bring new ones that are more costly – a well-known phenomenon in
health care expenditures. Third, the degree of openness of the economy may increase the need for a
larger public sector that acts as a buffer against external shocks^5. Finally and foremost, social attitudes,
mainstream economic or political thinking, and historical developments help understanding the evolution
of the size of the government^6. As evidenced by table (1), during the period between the 1870 French-
German war and WWI, total public expenditures to GDP were at a meagre 10-15%. Following the post-
WWII Keynesian revolution and the oil shock of the early 1970s, public expenditures soared to reach
levels above 50% of GDP in most countries. Over the last decade, public expenditures have somewhat
retreated in Europe.
Table 1 - Total public expenditures as a percentage of GDP – selected countries(^) 1880 1913 1920 1937 1960 1968 1974 1987 1995 2004
Austria n.a. n.a. 14.7c 14.8 35.7 40.6 41.9 52.4 53.2 50.6
Belgium n.a. 13.8 c 22.1 c 21.8 c 34.5 41.7 45.0 58.1 53.4 49.3
France 11.2 17.0 27.6 29.0 34.6 40.3 39.3 50.9 54.4 53.4
Germany 10.0a 14.8 25.0 34.1 32.4 39.1 44.6 47.3 57.1 46.8
Italy n.a. 11.1 c 22.5 c 24.5 c 30.1 34.7 37.9 50.8 52.3 48.5
Netherlands n.a. 9.0 c 13.5 c 19.0 c 33.7 43.9 47.9 62.4 59.6 48.6
Spain n.a. 11.0 c 8.3 c 13.2 c 18.8 21.3 23.1 40.5 46.0 38.6
Sweden n.a. 10.4 10.9 16.5 31.0 42.8 48.1 59.4 66.8 57.3
UK 9.9 12.7 26.2 30.0 32.2 39.3 44.8 42.9 45.2 43.9
USA n.a. 7.5 12.1 19.7 27.0 30.3 31.7 36.3 35.7 36.5d
Japan 9.0b 8.3 14.8 25.4 17.5 19.2 24.5 32.7 36.3 38.2e^
Sources: adapted from Maddison (1995) for 1880, Tanzi and Schuknecht (1997) for 1913-1960, OECD (1999) for 1968-1995, OECD (2005a) for 2004.
Notes: For 1913 and 1920: general government expenditures. : Western Germany for 1960-1987. a: 1881. b: 1885. c: central government. d: 2003. e:
- Because the table is aggregated from various sources, slight differences in the definition across years can appear.
The analysis contained in this report shall be read in the light of historical perspectives and current social
preferences towards the extent and functions of the welfare state. It shall also recognise the strong link
between taxation and the level of public expenditures, especially because of the need to ensure fiscal
discipline.
(^3) See Tanzi (1997) for a discussion.
(^4) Named after German economist Adolph Wagner (1835-1917).
(^5) See Rodrik (1998).
(^6) For example, most of the 19th century was characterised by low levels of government expenditure, reflecting the
dominant doctrine of Laissez-faire, itself possibly a consequence of 18th century's interventionism. Tanzi and
Schuknecht (1997). See also Musgrave (1985) for an enlightening review of history of fiscal doctrine.